Is Greece Lehman Brothers, or Is It RadioShack?

There is one big question that hangs over the last-ditch negotiations this week between the Greek government and its lenders, even if no one involved would frame it quite this way: Is Greece more like RadioShack, or more like Lehman Brothers?

Whenever a company files for bankruptcy, it is damaging for that company’s employees and shareholders — though it is often a necessary exercise to shed debt and give the company any hope of thriving in the future. But no two bankruptcies are the same.

Sometimes, as when the retailer RadioShack filed for bankruptcy protection earlier this year, the widespread reaction is not shock, but rather, “Wait, weren’t they bankrupt already?” Stores close, workers lose their jobs and the company just may relaunch under new ownership and in a leaner form, getting a fresh start.

Other bankruptcies go a little differently, none so dramatically as when Lehman Brothers filed in September 2008. Even though it was known that Lehman was ailing for months, the world was utterly unprepared for the idea that a major investment bank could default on its obligations.

The ripple effects were countless. The short-term funding on which all the biggest global banks relied froze up, and other financial firms that had similarities to Lehman, including Morgan Stanley, Goldman Sachs, Wachovia and Citigroup, were soon in peril. A global freeze-up in credit led to a sharp recession across much of the world. Seven years later we’re still grappling with the consequences.

Which brings us back to Greece. The country’s negotiations over the extension of a bailout program were coming to a head Wednesday as Prime Minister Alexis Tsipras flew to Brussels to confront skeptical leaders of other European nations.

An overriding premise of the response by European and Greek leaders over the last five years has been that Greece is more like Lehman Brothers than like RadioShack. If it were to do the nation-state equivalent of filing for bankruptcy — repudiate its debts, exit the eurozone, devalue its currency — it would cause catastrophic ripples across Europe.

With hindsight, it is clear that European creditors bungled their response by demanding extreme fiscal austerity without any pressure release valve to lessen the economic pain for Greek citizens. Normally when the International Monetary Fund lends money to a country in financial trouble, austerity measures are paired with currency devaluation and debt write-downs; in Greece there was no such relief.

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Protesters held Greek flags outside the parliament building in Athens on Monday during a rally demanding that Greece remain in the eurozone.CreditYannis Kolesidis/European Pressphoto Agency

But every time European lenders and Greek leaders have stared into the abyss, they have concluded that Greece was, or might be, Lehman Brothers.

The widespread thinking, particularly five years ago when the nation’s fiscal troubles began, was that allowing Greece to undertake its version of bankruptcy would have immediate and horrendous effects on the rest of Europe and the rest of the world economy. Major French and German banks, loaded up with Greek debt, might fail. The markets for bonds of other Southern European countries would collapse, too, creating a debt crisis in Portugal, Spain and Italy. Sixty years of progress toward a united, peaceful Europe may have been obliterated over a single failed debt negotiation.

In the worst case, it could have made the Lehman bankruptcy seem downright benign.

Those fears help explain why through five years of interminable negotiations to set and then renegotiate bailout terms, no matter how close Greece and the European Union seemed to the brink of a split, there was always a resolution.

Which brings us to 2015. Everyone is fed up. And there is a much stronger case than there was when this whole saga began that a Greek default and exit would be more like RadioShack than like Lehman.

Greek debt is now overwhelmingly held by European governments and its central bank, not private banks, so a default is unlikely to trigger a continentwide banking collapse. The European Central Bank has pledged to do “whatever it takes” to prevent a crisis of confidence in euro members’ debts, meaning it would backstop Portugal, Spain and Italy should markets lose faith.

You could even imagine that if Greece defaulted and left the eurozone, the politics would improve such that the remaining countries would become that much more united, moving toward still greater integration of bank regulation and fiscal policy.

Maybe. Or maybe that’s wishful thinking among people who are burned out on trying to salvage the Europe-Greece relationship and those who think a clean break five years ago would have been better in the first place.

German officials in particular have sent signals in recent months that they believe a Greek exit would be, if not ideal, fully manageable in a way it wasn’t a few years ago, and private analysts tend to agree that the landscape is different than it was from 2010 to 2012.

For the rather darker view, look to Larry Summers’s most recent Financial Times column, in which he warned that an independent Greece could become a failed state that would ultimately cost the rest of Europe much more than any bailout. For a slightly less alarmist take, Paul Krugman argued that the risk of a Greek exit lies more in the precedent it might set for the Portugals of the world, which could create continuing instability in the eurozone.

But there is a common thread in their work, and in that of manyothercommentators who have tried to make sense of what comes next for Europe: A breakdown in the talks and Greek exit really would open up some dark possibilities, even if figuring the exact odds of each of them is impossible. We may not know exactly what a collapse in the Greek talks would mean, but the bad outcomes are just bad enough to make muddling along look pretty darn good.